Tuesday, July 17, 2012

Srinagar under curfew in late June

Global Times (China), July 16

All it took was an electrical short circuit that reduced a mosque to ashes to make Indian-controlled Kashmir resemble the bad days of 2010. Late last month, the over 200-year-old Sufi shrine of Peer Dastageer Sahib in the capital Srinagar was set ablaze in what officials said was a wiring issue.

But this was considered suspicious by most Kashmiris, distrustful of the Indian state and convinced it was an act of arson given there was a power cut at the time and that when the fire brigade eventually showed up, most trucks had no water onboard.

As always in conflict zones, rumors travel fast and help turn up the heat. Protesters swarmed onto the streets, stones were thrown, and the military responded with day long curfews and by putting separatist leaders under house arrest.

To Kashmiris, this brought back the memories of the weekly shutdowns and demonstrations in Srinagar in 2010, when protesters and the military faced off in the worst year of violence since the 1990s, leaving 112 Kashmiris dead.

Then a week after Srinagar's second most holy shrine burned down, a rumor started spreading that a Shia mosque on the outskirts of the city was in flames, also attributed to an electrical wiring failure.

Although it turned out later that the mosque and a Quran were desecrated and there was no fire, the incident was enough for shops to shut, the streets to empty and for people to remain on edge.

How the fire at the Sufi shrine started is under investigation, but no statements from the authorities have been forthcoming.

The popular consensus is that some organization, some hidden hand, wanted to make Kashmir boil again, nearly two years to the day that protests started on June 11, 2010, when the Indian army shot unarmed demonstrators.

The events of 2010 are barely evident now. The slogans of "Go India, Go Back" and "Indian dogs go home" that were chalked on streets have been washed away and those on walls painted over, but demands for Azadi, freedom, remain.

According to a survey by London-based think tank Chatham House published in 2010, the first of its kind, 43 percent of the total adult population want independence, particularly in the Kashmir Valley Division, between 75 and 95 percent, and 82 percent of those polled in Srinagar.

Yet New Delhi has refused to offer a referendum, despite UN resolutions dating back to 1948 to do so.

As long as there is no viable resolution to the dispute in Kashmir, one of the world's longest running conflicts that has left 70,000 Kashmiris dead since 1989 and remains one of the most militarized places on earth, any small spark could trigger a return to 2010 and a renewed call by Kashmiris for freedom.

While there have been no further incidents, the fire and the attack on the mosque highlight how fragile the relative peace has been in Kashmir since the situation calmed down in early 2011.

Tourism, which accounts for an estimated 15 percent of gross domestic product (GDP), had returned, but the curfews prompted cancellations and are bad publicity.

Kashmir's geographically strategic location is of course a stumbling block to any solution, whether in terms of greater autonomy or independence. But around half of India's 1.3 million strong army is deployed in Kashmir alone. They are there to keep the Kashmiris check rather than to patrol the Line of Control with Pakistan or the sparsely populated mountainous areas.

The international community has ignored Kashmir, and Kashmir is portrayed rather simply in the Indian media as a problem of Islamic militancy rather than conveying many of the deep seated issues prevalent in the state.

Kashmir remains a global flashpoint, and a potential trigger for conflict between two nuclear powers.

International bodies should give extra impetus to effort to maintain the  relatively quiet situation in order to get talks going again.

Otherwise, it will just take another short circuit for Kashmir to descend into chaos once again.

Photograph by Paul Cochrane

Thursday, July 12, 2012

Turkey's New Commercial Code: Open for Business

Accountancy firms are fishing for more business after the new commercial code was passed.

Accountancy Futures

After 10 years in the making, the new Turkish Commercial Code will be given a warm welcome by both businesses and multinational accountancy firms

The development of commercial legislation in Turkey has failed to keep pace with the country’s economic growth over the past decade. While structural economic reforms have been carried out, a foreign investment law passed, and GDP levels more than tripled since 2002, Turkey has been slipping down the ranks in the World Bank’s Ease of Doing Business report. A key factor has been Turkey’s outdated Commercial Code, which was enacted in 1956, and the fact business has been kept waiting for a new 1,535-article Code drawn up over the past 10 years. Fortunately, this was finally approved by the Turkish parliament in January 2011 and will come into full force in 2013, and has been warmly welcomed by the private sector and its advocates, notably the multinational accountancy firms.
With Ankara inching towards European Union (EU) membership, over 90% of foreign direct investment (FDI) in the first half of 2011 originating from the EU, and with Turkey seeking to triple FDI from US$12.1bn in 2011 to an annual average exceeding US$30bn over the next decade, a new Commercial Code was long overdue. ‘For the past 10 to 15 years corporate governance has been affecting entities and companies, but there was nothing (legally binding) in the state code, so the new Commercial Code was needed on the demand side,’ says Professor Recep Pekdemir FCCA, a faculty member of the Istanbul Business School at Istanbul University.
The new Commercial Code is designed to mesh Turkish commercial regulations with EU legislation. It adopts International Financial Reporting Standards (IFRS) and auditing principles, and introduces concepts such as transaction auditing, penalties for non- compliance and mandatory company websites for posting financial data.
‘The most notable aspects of the new Commercial Code are the transparency of companies, corporate governance public oversight, accountability and quality assurance,’ says Nail Sanli, president of the Union of Chambers of Certified Public Accountants of Turkey (T√úRMOB). ‘The new Code is built upon the concept of transparency. Companies are required to have financial reporting complying with international standards and independent auditing of companies’ financial statements according to international standards. With the adoption of the corporate governance concept by companies, transparency will be achieved.’
With the new Code impacting all companies in Turkey there is a transition period before the law goes into effect. Implementation of a revised official set of Turkish Accounting Standards will occur on 1 July, but the provisions relating to IIFRS conversion, independent auditing and website requirements will not come into effect until 2013.
For the accounting sector to get up to speed with the new Code, training sessions have been underway for the past year at the country’s 30 leading auditing firms. ‘The accounting sector has always had very intense training programmes, but it has become more important because of the Commercial Code and we’ve implemented special compulsory training programmes,’ says Sanli.
But not all firms will have to invest in the same level of training. ‘Out of the top 500 companies, about 75% are owned by international investors, banks and insurance companies. These large-scale entities already apply international reporting standards, but it is different for the rest of the economy as they have not needed these kind of requirements,’ says Pekdemir. ‘Big foreign and local auditing companies will be expanding as more auditing is needed due to the Code, and they will increase their market share from auditing for large-scale entities to include small and medium-sized enterprises.’
Yet while the accountancy profession is stepping up its efforts, there will have to be improvements at a governmental level for the new Commercial Code to have full effect. As the US think-tank the Heritage Foundation notes on Turkey in its 2012 Index of Economic Freedom: ‘Property rights are generally enforced, but the courts are overburdened and slow, and judges are not well trained for commercial cases. The judiciary is subject to government influence. The intellectual property rights regime has improved, but infringement remains high.’ 

Further amendments 

Meanwhile, Turkish business has to contend with the fact that the Code may yet be amended still further. While 631 meetings were held over five years to draft the new Code, with ‘development, discussions and approval taking nearly 10 years’, says Sanli, further amendments are likely this year.
‘Before these two milestones are reached, in July and at the beginning of 2013, I expect there will be more changes to the law, such as implementation, amendments, guidelines and disclosure,’ says Pekdemir. ‘The Turkish Accounting Standards Board has the authority to make changes, while the finance ministry, which can be considered quite conservative, will want to make some amendments to hold back the powers of the big accounting firms.’ That said, given the efforts needed to get the Commercial Code passed, ironing out the practicalities is to be expected. For now, companies and foreign investors see the harmonisation of the new Commercial Code with the Corporate Income Code, Civil Code and Penal Code as a boon for business.

Turkey aims to become world’s 10th biggest economy

Turkey’s economy has been on a roll for the past decade, with its GDP more than trebling to reach US$735bn at the end of the 2010 fiscal year. With a population of 75 million and ideally situated at the crossroads between east and west, Turkey has built up a strong manufacturing-based economy. While a major exporter to the EU, Eastern Europe and the Middle East, domestic demand is strong, accounting for 70% of GDP. Turkey registered economic growth of 9.6% in the first nine months of 2011, the second fastest after China among the major economies, although it is forecast to slow to 4% this year. Nonetheless, Turkey aims to be the 10th biggest economy in the world by 2023 – it is currently 17th. 

Photograph by Paul Cochrane

SYRIAN BANKING SECTOR: Doors close across the border

Expansion plans unravel as Syrian crisis deepens

Executive magazine
Uprising and sanctions keep customers  away from Lebanese banks in Syria

Lebanese banks with operations in Syria are caught between the proverbial rock and a hard place. The uprising that kicked off last spring has forced banks into survival mode as the Syrian economy has weakened and profits have been slashed. Some banks have considered exiting the country, expansion plans have been put on hold, and all players have set aside millions of dollars in provisions.
While Lebanese bankers are used to operating in crisis mode, the international sanctions against Syria — by the United States, the European Union and the Arab League — have presented further operational challenges and the specter of reputational risk. Although Lebanese banks are not legally obligated to comply with the sanctions — and operations within Syria are essentially unaffected — the sector has pledged to do so. The US Treasury in particular has breathed heavily down the necks of Lebanese bankers to comply with the sanctions and for Lebanon to not be a conduit for Syrian cash.
Such internal and external pressure has impacted the bottom lines of the seven Lebanese banks with Syrian affiliates, both within the affiliate itself and at group headquarters in Beirut. For while Lebanese banks only entered Syria from 2004 onwards, the market was under-banked and ripe for growth, with the banks attracting $6.79 billion in aggregate assets by the end of 2010.
“Before the uprising the banking sector was on a fast track and expanding throughout Syria. Profits were good and it was a virgin market that needed everything,” said Samih Saadeh, managing director of Banque Bemo, which has a stake in Banque BEMO Saudi Fransi (BBSF) in Syria.
At the end of 2011, aggregate assets had dropped by 17.2 percent to $5.8 billion. As Saad Azhari, chairman and general manager of BLOM Bank put it, “Syria was the (sector's) second most important market after Lebanon.”

The pull of gravity
Indicative of the impact of the uprising on the banking sector is BLOM's affiliate, the Bank of Syria and Overseas, where loans to Syrians dropped 60 percent over the past year, from $650 million to $250 million. As Jihad Yazigi, editor of the financial publication, The Syria Report, remarked: “Nobody is investing, nobody is spending, and companies are closing. Whole areas are out of business entirely. I think gross domestic product will decline 10 to 12 percent this year.”
To cover bad loans and banks’ exposure, provisions are being hastily put aside (see table). “All Lebanese banks are taking profits as collective provisions,” said Alain Wanna, head of Group Financial Markets Division at Byblos Bank. “In Syria the decision was for all profits made in Syria to act as collective provisions, as we don’t know how long (the instability) will last.”

Financial Safety Valve

Last year, Bank Byblos Syria's profits slumped 26.8 percent to $3 million. Wanna conceded that internally, the bank's management discussed exiting Syria on several occasions, but in the end decided to reduce its exposure to the country. 
Most affected by the Syrian crisis has been Bank Audi Syria (BAS), with profits down 83.20 percent to $2.1 million, attributed to problems with their portfolio (BAS' management turned down Executive’s interview requests). Less affected have been the newcomers, BLF's Al Sharq, First National Bank's Syria Gulf Bank, and Fransabank Syria, which saw profits, assets and customer deposits actually increase. BLF's general manager, Walid Raphael, put Al Sharq's 72.2 percent growth in assets, from $161 million in 2010 to $284 million in 2012, down to its recent start and a focus on commercial rather than retail banking, adding a new branch that opened in May. However, that has been the exception rather than the norm.
BBSF, the largest private bank in Syria with 40 branches, has put on hold plans to open three new branches in Damascus and one in the conflict-ridden city of Homs. “We are not looking for more business, but our strategy is to stay there and no branches have closed except in the hot areas,” said Saadeh. Profits at BBSF dropped 1.2 percent last year, to $11.8 million, but in the first quarter of 2012, with BEMO holding 22 percent of BBSF and profits down, the Beirut arm “got zero,” said Saadeh, which negatively impacted BEMO's net profits, dropping 53.57 percent on the first quarter of 2011, to just $1.45 million.
Causing further headaches for the sector was a requirement by the Central Bank of Syria (CBS) initiated prior to the uprising, for banks to increase capital from $100 million to $200 million. “There was a list of banks and a schedule for each to reach (in phases),” said Byblos’ Wanna. “Ours was in August last year. We tried to negotiate with the CBS to say the balance sheet was down but they insisted on the increase.” Currently Byblos Syria’s capitalization is $120 million for a balance sheet of $700 million. BBSF has also reached the first phase of the higher capital requirements.

Looking ahead
The banking sector has proved remarkably resilient in the face of the conflict. The limited run on the banks last spring by depositors was a “panic move,” said Saadeh, while deposits and withdrawals have “balanced out” since then. Bank share prices on the Damascus Stock Exchange (DSE) have also not plummeted as some might have expected, although they have been somewhat artificially salvaged by only 3 days of trading  a week, and stock only being allowed to decline by just 1 percent a day and increase by 5 percent. Nonetheless, the DSE has slumped by 40 percent since the uprising broke out, according to figures released by the International Monetary Fund.

Cross Border Performance
Summing it up

“We’ve not seen any banks go under in Syria yet, and that is a positive thing. People haven't withdrawn all their money and I see it as a stabilizing factor,” said Ayham Kamel, a Syria expert at risk consultancy firm, Eurasia Group, who formerly worked in the Syrian financial sector.
Yet with the economy expected to contract further this year, more sanctions slapped on Syria by the EU in May — including on the CBS governor Adib Mayaleh — and operational costs higher due to the crisis amid a slump in business, the outlook for Lebanese banks in Syria could not be described as peachy.
“There is a risk for Lebanese banks at some point, as I'd expect them to hit the red zone and become unprofitable,” said Kamel. “To me, it is not a question of if but when, given the current trajectory in Syria. They are going to find it very hard to manage the books and have profitability towards the end of the year or in 2013.”

Thursday, July 05, 2012

Sand Storm: UAE real estate

Estates Gazette

After a rocky four years, property developers in the once-booming desert cities of Dubai and Abu Dhabi are facing increased pressure to merge. Paul Cochrane reports

It has been a tough few years for property developers in the once-booming desert paradises of Abu Dhabi and Dubai. Having expanded rapidly in the boom years, prices in some areas crashed by 60% since 2008, and projects have been cancelled or delayed.
In some cases, partially constructed developments have been torn down. The government-backed developers that dominate the market have been left struggling to refinance debts. State-backed Emaar, Dubai Holding, Aldar and Sorouh have so far managed to ride out the storm, alongside private developer Damac. Conglomerate Dubai World last summer transferred ownership of developers Nakheel and Limitless to a new Dubai government entity.
But the repercussions are still playing out. Last week, state-owned investment vehicle and sovereign wealth fund, Mubadala Development Company, which was left owning 49% of struggling Aldar Properties after a recent government bailout, said it would transfer a 14% stake in the developer, worth around AED700m (£100.2m), to Abu Dhabi Commercial Bank in return for a loan facility.
Mubadala said the 579.1m shares will revert to it in April 2013 when the facility matures, or earlier if repaid ahead of schedule – although it refused to say how much the loan would be for. It was the latest in a long line of financial measures aimed at refinancing the developer behind some of the emirate’s biggest schemes, such as Abu Dhabi’s partially completed Central Market and the luxury Al Raha beach resort.
The property company has been bailed out by the Abu Dhabi state twice in two years for a total package worth almost AED36bn (£6.1bn). In March, it announced it was considering a merger with fellow state-backed developer Sorouh Real Estate, the developer behind the 23-storey Al Murjan Tower in Abu Dhabi and the 5.5m m2 Lulu Island mixed-use resort But agents in the emirate remain sceptical about whether the merger will go ahead because of the political nature of the deal and the prestige attached to these prominent state-backed developers.
“There has definitely been a consolidation of real estate players in line with government policy to cut back supply,” says Craig Plumb, head of research Middle East-North Africa at Jones Lang LaSalle in Dubai. “They’ve realised there are too many developments, so are trying to improve the financial viability of developers.”
The staff of developer Limitless, for instance, are now working under Nakheel on its infamous artificial archipelago, Palm Jumeirah. He adds: “Sorouh and Aldar are talking about merging, but it may not go ahead. There was the same discussion in Dubai (in 2009) to merge Dubai Holdings and Emaar, although it didn’t go ahead at the end of the day. But consolidation is going on, and there will be fewer but bigger players that are largely state controlled, either 100% owned or with a degree of government control.” 

Ben Waddilove, a chartered surveyor who works closely with real estate companies in the Gulf through his role as director of recruitment consultancy Macdonald & Company Overseas in Dubai, agrees: “They will probably review it for three months and then review again. I wouldn’t put money on it happening. From a business view it makes sense, but from a political view it could be more difficult to implement as there is pride and influential owners to consider. However, I suspect there might be more [merger] moves on the cards.”
“The survivors are the big giants, but in a sense they are becoming bigger, and more and more powerful,” says the infamous Porush Jhunjhunwala, head of Better Commercial, the commercial arm of property research company Better Homes. And Jhunjhunwala points out that tough times are set to continue for the remaining big developers in the region, perhaps increasing the appeal of further consolidation.
According to Better Homes, 2.3m m2 of office space has come onto the Dubai market since 2009, and by the end of 2011 there was a total office stock of 5.9m m2. At the same time, occupancy stands at 3.1m sq m2. The majority, at 57%, is located in onshore locations, and is available only to companies licensed by the emirate’s department of economic development, while the remainder is in Dubai’s special tax status free zones. Within the next two years, a further 1.4m m2 is expected to enter the market, while in neighbouring Abu Dhabi, the 1m m2 slated to be handed over in 2012 and 2012 will result in “excess supply”, says Jhunjhunwala. “I assume this will add to the current vacancies in the market, and might double pressure on rent, with the prices coming down in the short term.”
However, Mat Green, head of research and consultancy at CBRE in Dubai, says that, if developers can just hold on that little bit longer, he sees signs of the market stabilising.
“This year has mostly been about stability,” says Green. “We have not seen much growth and it is pretty flat for the whole Gulf market. It is down to individual products, even in a specific location, and it is very fragmented. One property may be empty, while next door there’s demand.”
And while institutional investors remain wary about investing in the GCC region, Dubai has benefited from the instability elsewhere in the Middle East and North Africa over the past year. Agents speculate that the trend may well benefit the recovery in the UAE property market – and its struggling property developers.
“There has been more regional money coming in with people looking for a more calm place,” adds CBRE’s Green, “and that is definitely Dubai at the moment.”

BOX: Desert Space

In Abu Dhabi, Doha and Qatar, the oversupply of commercial space has resulted in government departments renting offices in prime locations – as much as 25% of office space in Doha’s West Bay – to help bolster the market, as well as to appease local developers and prop up state-owned developers.
According to CBRE data, the average rent per m2 in Abu Dhabi has fallen from AED3,500 (£55.46 per sq ft) in 2008 to AED1,400 (£22.11 per sq ft) at the end of 2011. In Dubai, while there has been an uptick in demand for office space in the central business district leading to a stabilisation in rents over the past six months at around AED150 (£25.58) per sq ft, the oversupply in secondary areas has led to rents lower than the city average of AED90 (£15.35) per sq ft.
The outlook for the Dubai residential sector is equally mixed, with prime real estate in well-established locations seeing improved performance in 2011. In the majority of locations, however, rents and prices have declined.
“We are starting to see that, within each sector, some prices are increasing and others unchanged, and others are falling, which will continue to be the case over the next 18 months,” says Craig Plumb, head of research Middle East-North Africa at Jones Lang LaSalle in Dubai.
According to JLL, around 13,000 homes – 90% flats – were completed in 2011, a rise of less than 4%, bringing residential stock to 336,000 homes in Dubai. Some 38,000 homes are due for completion this year – an increase in stock of 11% – but JLL forecasts only 60% of scheduled stock, or 23,000 homes, will be completed in 2012.
With so many flats available, and few projects under way, there is an increasing focus on property management. “The big trend is away from asset creation to asset management, as there still needs to be more emphasis on maintenance and property management,” says Plumb.
“There is going to be big growth in such services in a market where there is too much supply.” Improving maintenance is not only a rental issue but one that has plagued investors, with owners hit with unexpectedly high service fees by developers, as occurred on the Nakheel- developed Palm Jumeirah, where charges were raised by 50% last year. The lack of transparency in what is included in property prices is considered a potential impediment for investors and has been a cause for legal battles in Dubai courts.
Meanwhile, Strata laws that pass responsibility for building maintenance from developers to tenants’ associations, introduced last May, have still not come into full force.
“I hear from legal acquaintances that, at the courts, there is a backlog of potential cases to be resolved,” says Mat Green, head of research and consultancy at CBRE in Dubai. “Investors want as much information as possible about what they will actually pay. There is not yet full disclosure on how money is spent and that really needs to change. Unless these problems are ironed out, the market will be constrained.”